Davis Select U.S. Equity ETF

DUSA reported second-quarter 2012 total product revenue of $11.7 million, up $2.1 million or 21% versus Q2 2011. U.S. Kerastick revenue was $11.2 million, up $2.0 million or 22%, on 74,000 units sold versus 65,000 a year ago; management said the increase reflected a 14% volume gain and a 7% price increase. BLU-U revenue was approximately $500,000 and flat year over year, with 66 units sold versus 56 last year. GAAP net income was about $2.2 million, or $0.08 per diluted share, versus $1.1 million, or $0.04, a year ago; non-GAAP diluted income from continuing operations was $1.6 million, or $0.06 per share. Gross margin dollars rose to $10.0 million from $8.2 million, and blended gross margin was 85%. Cash flow from operations was $2.3 million in the quarter, and cash/cash equivalents/marketable securities were $31.3 million at quarter-end versus $28.2 million at year-end 2011. For the first half, management said U.S. revenues were up $4.8 million, or 24%, cash flow was $3.1 million, and non-GAAP income from continuing operations was $3.6 million. No formal revenue or EPS guidance was given, but management said Q3 should be the slowest quarter seasonally and that they believe they are on track for a strong second half, which historically represented 53% of annual U.S. Kerastick volume.

Bob Doman struck a constructive tone, saying the quarter was strong across sales, margin, and cash flow, and that the company remained profitable while continuing to invest. He emphasized that DUSA is using the BLU-U and Kerastick franchise to build on topline growth, while also advancing studies aimed at expanding the Levulan label and developing a next-generation formulation. He framed the next-generation product as a primary growth initiative and said the longer-term goal is to improve efficacy, shorten treatment time, and eventually support international expansion.

Rich Christopher focused on the financial mechanics behind the quarter: revenue of $11.7 million, GAAP diluted EPS of $0.08, non-GAAP diluted EPS of $0.06, and cash generation of $2.3 million. He said product gross margin improved by $1.8 million year over year, from $8.2 million to $10.0 million, entirely due to Kerastick margin expansion, while blended margin stayed at 85% and Kerastick margin at 89%. He also noted that incremental gross margin was largely reinvested into $1.8 million of added operating expenses, most notably clinical development, while the balance sheet ended at $31.3 million in cash and marketable securities.

Analysts focused on whether the company was seeing a cleaner read on pricing and true volume growth after annual price increases, and management said the first full year of annual January 1 pricing should create a cleaner year-over-year comparison. Questions also centered on R&D seasonality, with management saying spend on the two current trials should be lower in the second half, partly offset by next-generation Levulan work. On BLU-U, management said placements are often driven by year-end buying, the AAD promotion, and the lag between evaluation placements and purchase decisions, typically around three months. Analysts also pressed on the next-generation Levulan timeline and market opportunity; management said launch could be around 2018, clinical work may begin in late 2013 or more likely 2014, and the international opportunity could roughly double the overall market.